Ecuador’s Ingenious Descending Auction

There’s something quite elegant about Ecuador’s proposed bond auction. It’s not doing a typical old-bonds-for-new-bonds exchange, which no one would tender into. And it’s not trying to buy up its debt in the secondary market, where it could be picked off by mercenary Wall Street trading desks. Instead:

The South American country will seek to repurchase the 2012 and 2030 bonds, which were issued as part of a 2000 debt restructuring, in a series of auctions, [Economy minister Diego] Borja said. He said the government will lower the price it offers with each subsequent auction. He declined to specify at what price the buybacks will start.

Looking at the history of bond holdouts against Argentina, which is full of legal victories but which from a financial perspective has largely been a bust, it’s easy to see how litigation-averse creditors would opt to take jam today rather than a hope of more jam tomorrow.

But I do see one big obstacle: Ecuador is still going to need some kind of an exchange agent, a Wall Street bank which will run the offer, make sure it goes smoothly, get it lawyered up so that it conforms to SEC regulations, and generally act as an intermediary between Ecuador and its bondholders. And I can guarantee you that desperate as they are for funds, Wall Street’s banks are not exactly knocking down Borja’s door vying for this mandate.

If this auction isn’t run transparently and efficiently, it could easily descend into farce. So Ecuador’s first big task will be to persuade its bondholders that the exchange is credible. And given the country’s demonstrated ability to bugger these things up — not to mention the fact that it’s lost its longstanding counsel, Cleary Gottlieb — I’m not holding my breath.